Chapter 5- life insurance underwriting & policy issue

Question 1

Adverse Selection

Answer 1

the tendency of a disproportionate number of poor risks to seek or buy insurance or maintain existing insurance in force (i.e., the selection against the insurance company). Sound underwriting reduces adverse selection.

Question 2

is the date halfway between birthdays when the applicant’s age changes to the next higher age. With some insurers, the age is based upon the applicant’s age at his nearest birthday. In others, it is based upon the age of his last birthday.

Answer 2

Age change

Question 3

The applicant

Answer 3

is the person completing the application to the insurance company for the insurance policy. In most cases, the applicant is also the proposed insured, but this is not always the case

Question 4

The application

Answer 4

is the Statement of information given when a person applies for life, health, or disability insurance. The insurance company’s underwriter uses this information as a basis in determining whether the applicant qualifies for acceptance under the company’s guidelines.
- Applications are attached to and made a part of all individual contracts.

Question 5

Attending Physician Statement (APS)

Answer 5

these are used when the application or medical examiner’s report reveals conditions or situations, past or present, about which more information is desired. Because of Physician/Patient confidentiality, the applicant must sign an authorization, which allows the physician to release information to the insurance company underwriter.

Question 6

Backdating

Answer 6

the practice of making the effective date of a policy earlier than the application date.
- used to make the issue age lower than an applicant’s real age in order to get a lower premium.
- State laws usually limit the time to which policies can be backdated to six months. Backdating is not allowed in variable contracts due to the nature of the investment.

Question 7

Binding Receipt (Unconditional Receipt)

Answer 7

It is one of the types of receipts given by an insurance company upon the completion of an insurance application if the initial premium is collected with the application.
- Insurance becomes effective on the receipt date and continues for a specified period of time or until the insurer declines the application.

Question 8

A pamphlet that describes and compares various forms of life or health insurance.
- must be provided to a consumer by the producer when the latter is attempting to solicit insurance
- makes information available to the consumer that helps them make an informed decision when purchasing insurance coverage.

Answer 8

Buyer’s Guide

Question 9

Conditional Receipt

Answer 9

a form customarily required to be signed by the agent and given to the prospective owner at the time a new application is completed.
- Most require that the agent collect an initial premium and, in turn, grant some level of limited coverage under special conditions before issuing the policy.
- Without a valid conditional receipt, no coverage is in force until the policy is issued, delivered, and accepted with the initial premium paid.

Question 10

a detailed background investigation that may include an interview with coworkers, friends, and neighbors about an applicant’s character, reputation, lifestyle, etc.
- Insurers can conduct to obtain additional information as long there is no invasion of privacy present.
- A common type involves a credit report.

Answer 10

Consumer Report (Investigative Consumer Report)

Question 11

Credit Report

Answer 11

a summary of an insurance applicant’s credit history (credit score, debt levels, repayment history, and assumed creditworthiness, etc.), made by an independent organization that has investigated the applicant’s credit standing.

Question 12

Credit reports are typically obtained from one of the three major credit bureaus

Answer 12

Experian, Equifax, and TransUnion

Question 13

Declined risk describes an individual

Answer 13

whose application for coverage was rejected by an insurance company.

Question 14

a disclosure form is a

Answer 14

comparison form required by various state regulatory agencies to be given to every policy owner when replacing an existing policy with another.

Question 15

Evidence of Insurability

Answer 15

a statement or proof of a person’s health history and current health status that qualifies that person for coverage.

Question 16

The Fair Credit Reporting Act

Answer 16

a federal law passed in 1970 that provides an insurer with the right to receive additional information with regard to applicants for insurance coverage.
- This law permits an insurer to conduct a consumer report on applicants and proposed insureds.
- An applicant for insurance must be informed of the purpose of the report and has the right to receive a copy

Suppose coverage is declined due to information in the report. In that case, the insurer must provide the name and address of the reporting agency so that the applicant can secure a copy of the information in the report.

Question 17

The field underwriter

Answer 17

is the agent or producer completing the applicant’s application for insurance.

Question 18

Inspection report

Answer 18

a report that contains general information regarding the health, habits, finances, and reputation of an applicant. This report is developed by a firm that specializes in rendering this type of service.

Question 19

Insurable interest

Answer 19

describes the financial or emotional relationship between two or more parties justifying one owning a life insurance policy on the other.
- People are said to have an unlimited insurable interest in their own life.
- may exist in another person’s life if there is a chance of a financial or emotional loss at that person’s death.
- must exist at the time of policy issue.

Question 20

The Medical Information Bureau

Answer 20

a service organization that collects medical data on life and health insurance applicants for member insurance companies.
- detects misrepresentations, helps identify fraudulent info
- information released to MIB about a proposed insured may be released to the proposed insured’s physician

Question 21

Policy Summary

Answer 21

summarizes the basic terms of an insurance policy, including the conditions, coverage limitations, and premiums. Policy summaries are often used with life insurance, long-term care insurance, and annuities.

Question 22

describes an applicant who represents the likelihood of risk lower than that of the standard applicant, typically due to better than average physical condition, occupation, mode of living, and other characteristics compared to other applicants of the same age.

Answer 22

Preferred risk

Question 23

The proposed insured

Answer 23

is the person whose life is requested to be insured. Typically, but not always, this is also the applicant.

Question 24

Rated policy (rating up)

Answer 24

the basis for an additional charge to the standard premium because the person insured is classified as a higher-than-average risk. The above standard rates usually result from impaired health or hazardous occupations.

Question 25

Replacement

Answer 25

a legal activity where a producer convinces a prospective client to lapse or surrender a life or health policy and purchase a new one.
- Producers must provide a “Notice Regarding Replacement” to the consumer when this activity may occur.

Question 26

Most State laws specify that the applicant’s statements on the application are considered ____ and not warranties

Answer 26

representations

Question 27

describes the underwriting category into which risk is placed depending upon the applicant’s susceptibility to injury, illness, or death.

Answer 27

Risk Classification

Question 28

Special class

Answer 28

describes an applicant who cannot qualify for a standard policy, but may secure one with a rider waiving the payment for a loss involving certain existing health impairments.
- They may be required to pay a higher premium or to accept a policy of a type other than the one for which he has applied.

Question 29

Standard risk

Answer 29

describes a person who, according to a company’s underwriting standards, is considered an average risk and insurable at standard rates.
- High-risk or low-risk candidates may qualify for increased or discounted rates based on their deviation from the standard.

Question 30

Substandard risk (impaired risk)

Answer 30

describes an applicant whose physical condition does not meet the usual minimum standards.
- If due to adverse health, the application may be declined or written with a “rated-up” premium.
- An applicant may be in excellent health but considered substandard due to their activities, hobbies, or avocations (i.e., scuba diving, skydiving, etc.).

Question 31

An underwriter

Answer 31

is a person who identifies, examines, and classifies the degree of risk represented by a proposed insured in order to determine whether or not coverage should be provided and, if so, at what rate.

Question 32

the analysis of information obtained from various sources pertaining to an applicant for insurance and the determination of whether or not the insurance should be issued as requested, offered at a higher premium, or declined.

Answer 32

Underwriting

Question 33

A ___ must be absolutely and literally true. A breach of… may be sufficient to void the policy whether or not the …. is material and whether or not such breach of …. had contributed to the loss.

Answer 33

warranty

Question 34

Part I: General Applicant Information (age, DOB, Sex, address, marital status, occupation)

Answer 34

• type of policy
• amount of insurance
• name and relationship of the beneficiary
• other insurance the proposed insured owns

Question 35

Part II: Medical and Health History

Answer 35

• focuses on the proposed insured’s health and asks several questions about the health history, not only of the proposed insured but of the proposed insured’s family, too

Question 36

Part III: The Agent’s Report or Statement

Answer 36

• agent’s report statement
• applicant’s financial condition, background, purpose of sale, etc.
• The agent provides additional information about the applicant’s financial condition and character, the background and purpose of the sale, and how long the agent has known the applicant.

Question 37

USA Patriot Act

Answer 37

• enacted in 2001
• requires insurance companies to establish formal anti-money laundering programs
• purpose of the act is to detect and deter terrorism

Question 38

substandard - ___ risk - ___ ___- ___ premiums

Answer 38

high; rated up; higher

Question 39

declined- not insurable -

Answer 39

potential of loss to insurance company is too high

Question 40

temporary insurance agreement

Answer 40

similar to the binding receipt, this type extends coverage immediately
- if the insured dies during the underwriting period, the claim will be paid

Question 41

the effective date is important for 2 reasons:

Answer 41

• identifies when the coverage is effective
• establishes the date by which future annual premiums must be paid

Question 42

constructive delivery

Answer 42

policy delivery may be accomplished without physically delivering the policy into the policy owner’s possession
- mailing the policy to the agent

Question 43

If the company instructs the agent not to deliver the policy unless the applicant is in good health, there is no ____ ____

Answer 43

constructive delivery

Question 44

personal delivery

Answer 44

• allows the producer to explain the coverage to the insured (such as the riders, provisions, and options)
• builds trust and reinforces the need for the coverage

Question 45

Acts that can be considered means of delivery: (3)

Answer 45

• mailing policy to the agent
• mailing the policy to the applicant
• the agent personally delivers the policy